To go along with Ray's posting, the Economist.com has a nice graphic of the revisions to GDP that accompanied the latest release by the BEA. One consequence of this major revision is that the U.S. economy is now believed to be smaller than it was before the crisis hit. The depression continues.

The report of the Bureau of Economic Analysis of the Department of Commerce on the 2nd quarter GDP released today, Friday, July 29, 2011, indicates that the statistical agency may have become politicized. Readers of this site may be aware that we complained recently that the Bureau of Labor Statistics report on unemployment claims likewise showed evidence of political influence. It is not so much that either agency falsified data but they presented the data in such a way as to give the reader a false impression. This is how the BEA’s analysis released Friday July 29, 2011 began:

"National Income and Product AccountsGross Domestic Product: Second Quarter 2011 (Advance Estimate)Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011,(that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.(italics ours)" We believe that it may have actually decreasedl ...

In the Pittsburgh Tribune-Review of July 27, 2011, George Mason University’s Prof. Donald J. Boudreaux defends economists who qualify their counsel by saying “but on the other hand”, causing Pres. Truman to quip that he longed for a one-armed economist. Social reality is complex, he argues, and economists are unable to make precise predictions as those in the physical sciences can. Unfortunately he chooses to illustrate his thesis by making an argument for “free trade”, using the history of tariffs in the U.S. as an example. He writes,

"Protectionists today are fond of pointing out that U.S. tariffs in the 19th century were high by modern standards, and that economic growth during that century was also impressively robust. From these two facts, protectionists dive into the conclusion that America’s 19th century growth was promoted by tariffs. Protectionists then assert that if we would raise tariffs to heights not seen in generations, today’s economic troubles would be diminished. Reality, though allows no such simplistic conclusion."

Boudreaux raises a “straw man” in his argument that “If free trade discourages economic development, it’s difficult to explain the economic growth that took place in the 19th century among the tariffless U.S. states spanning a huge continent.” But that does not deny that our high tariffs facilitated the growth of American industry.

We know of no economist who advocates protective tariffs or who argues that free trade impedes economic growth. These are “straw men” and easy to knock down. We have no hesitancy in saying that the 19th century tariffs did contribute to the robust growth of the American economy just as China’s and Japan’s barriers to imports and subsidies to exports and adoption of other mercantilist policies, contributed to their robust growth in the 20th and 21st centuries. ...

Why should Congress impose a debt limit if it is not going to be enforced? Why pass a debt limit if it is going to be raised as soon as the debt approaches it? The purpose of the debt limits is to force Congress and the administration to live within its means. A good case can be made for making the current debt limit permanent. The House under the constitution has the obligation to initiate all spending bills. Its request that as a condition of temporarily increasing the debt limit, expenditures must be brought under control is entirely reasonable. As we have shown repeatedly on this site, the federal government has been wasting enormous resources.

The administration’s assertion that we risk another recession ignores the fact that that recession has already lasted long enough to be called a depression with some 26 million workers unemployed and underemployed. The fact that the Obama administration has been in power two and a half years and its budget deficits have amounted to more than four trillion dollars without making a dent in unemployment, tells us that we have been governed by economic incompetents.

The administration claims that refusal to raise the debt limit will have serious economic consequences. Raising the debt limit without balancing the budget is what would have the unfortunate consequence of destroying the U.S. economy. The dollar would continue its fall and would be replaced by a new international standard. China, Brazil, and Russia have already proposed a new standard. Reducing the federal deficit as a condition of any increase in the debt limit will have positive economic effects. And, if we add reducing our huge international trade deficit, the dollar would continue its status as the international standard that succeeded the gold standard....

President Obama wants to single out oil companies. Specifically, US businesses get credit for foreign taxes paid (not royalties but corporate taxes paid) against their US tax liabilities—he wants that curtailed for oil companies....

No doubt in coming days, the debt limit will be raised -- more’s the pity – but the country will be no better off as a result. Oh, raising the debt limit might prevent uncertainty in stock and bond markets but we do not suffer angst at the problems of investors in those markets. We are depressed by the fact that nothing – literally nothing of significance --is being done to create good jobs for the 26 million unemployed and underemployed (part-time) workers who are without good full-time jobs. We have two parties afraid to offend any significant block of voters. The Republicans to their credit are willing to make changes as the Cut, Cap, and Balance legislation passed in the Republican House and tabled in the Democratic Senate shows. There is no Democratic proposal to cut expenditures on the table, only proposals for increased taxes.

We have two parties – except for the Tea Party supporters and libertarians -- beholden to their corporate contributors which derive most of their profits from foreign subsidiaries and then add insult to injury by importing their foreign-made products. We have one party dedicated to union leaders who have a Luddite mentality. When was the last time you bought a costly advanced technological product made in the U.S.? Only the Tea Party, which is not beholden to any special group, are willing to do something serious about our problems.

The Cut, Cap, and Balance Act of 2011 which passed the House and was tabled in the Senate reduces discretionary spending by $31 billion compared to last year, and reduces mandatory spending by $51 billion in fiscal year (FY) 2012. From FY 2013-2021, the legislation caps federal spending at the same levels (as a percentage of GDP) as the House-passed FY 2012 budget resolution. Ultimately the legislation will save $5.8 trillion over 10 years. And what has the President proposed? Nothing but higher taxes and growing deficits.

But there are many cuts that should be made outside of the entitlement programs. The Department of Education spends $36 billion per year. There is no evidence of improved educational outcomes as a result of federal spending of hundreds of billions of dollars. End the program; it is not a federal responsibility at all. Saving $36 billion per year. And there is more. ...

According to the Los Angeles Times, the House Republicans just passed a plan that would only reduce the $1600 billion 2012 budget deficit by $111 billion. Here's a selection from the story:

The proposal would cut spending by $111 billion in 2012 and cap future outlays to 19.9% of the nation's gross domestic output. It also would require that Congress send a balanced-budget constitutional amendment to the states for ratification, a lengthy process.

Meanwhile the so-called "gang of six" consisting of three Senators from each party put together a plan which is a lot like Rep. Paul Ryan's House Budget Plan in that it would slow the growth in government spending while reforming the tax code in hopes that lower marginal rates would help the economy. You can read the executive summary here....

The U.S. Department of Labor is headed by a political appointee, Hilda Solis. It is natural that she would want the President who appointed her to look good. Not that she would order the employment data to be doctored in any way. However, she could ask the Bureau of Labor Statistics to present the data in a way that emphasizes “good” news, if possible. Whether or not any such request was made by the Secretary, the fact is that employment data that was released last week tends to emphasize the data most favorable to the President.

On Friday, July 15, 2011, the BLS reported the number of new unemployment claims filed during the week ending July 2nd, increased by 15,000 compared with the previous week. The first paragraph reported, “The advance number for seasonally adjusted insured unemployment during the week ending July 2 was 3,727,000, an increase of 15,000 from the preceding week's revised level of 3,712,000.” And that is what all the media reported. But that was not the actual number of claims filed. The actual numbers were reported in the second paragraph.

The BLS report of unemployment insurance claims for the week ending July 9, unadjusted, totaled 470,671, an increase of 45,031 from the previous week, not 15,000. The media reported only the data in the leading paragraph. ...

President Obama, Congress and the Federal Reserve have had a hard time stimulating the American economy, but they have done a great job of stimulating the Chinese economy.

In May 2012, according to data released on July 12 by the U.S. Commerce Department, U.S. net goods exports to China (exports minus imports) hit a 12 month record low of a negative $286.5 billion for the 12-month period from June 2010 through May 2011, as shown in the graph below:

Meanwhile, U.S. overall net exports with the world also took a hit in May, with net exports of goods and services falling from a negative $43.6 billion for the month of April to a negative $50.2 billion for the month of May, on a seasonally adjusted basis....

Princeton Prof. Alan Blinder, in an opinion piece in the Wall Street Journal, 7-13-11 demonstrates the mental bankruptcy of most of America’s leading economists when it comes to developing solutions to reduce unemployment. He finds the May and June, 2011 unemployment reports “catastrophic”. The fraction of the population that is employed is lower than it was “when the recession officially ended in June, 2009”. (Officially?!). Republican proposals “to slash government spending” are “ways to kill jobs, not create them”. So what does the professor, a former member of the Board of Governors of the Federal Reserve System and a member of Pres. Clinton’s first Council of Economic Advisors, recommend?

He prefaces his recommendations with two statements one of which we challenge. First, he writes, there is no magic bullet. Yes there is as we show below– it is called “balancing trade” by our single-country scaled-tariffs. Over the last four decades, China and other countries, including Japan, Germany, and the OPEC countries have siphoned an estimated five to eight million jobs from the U.S. manufacturing sector. We can recover those eight million jobs.

Second, “there is no free lunch” by which he means the U.S. taxpayers will have to pay for the solution. And what is his solution? He begins his proposal with the statement that “Creating jobs cost money –whether it’s via tax cuts or more spending." We have already spent trillions of dollars since 2009 in tax cuts and more spending, including a Keynesian $800 billion economic stimulus plan, and as Blinder pointed out, the result of all this spending was a level of employment lower in 2011 than it was in 2009. ...

The first presidential report to Congress on manufacturing, Alexander Hamilton's 1791 Report on Manufactures, was a classic; it shaped American industrial policy for 150 years. The latest report, the Report to the President on Ensuring American Leadership in Advanced Manufacturing published last month by the President's Council of Advisors on Science and Technology (PCAST), shares many similarities. Both reports recognize that manufacturing leads to economic strength and to innovations. Hamilton recommended tariffs; the latest report recommends new incarnations of President Reagan's successful SEMATECH consortium as well as a cut in the corporate income tax. Although it represents a step in the right direction, the new report does not go far enough.

It is always a pleasure to read something written by Ralph Gomory, Research Professor at the Stern School of Business, New York University. He wasVice President for Science and Technology for IBM for two decades, thenbecamePresident of the Alfred P. Sloan Foundation from 1989 through his retirement in 2007. What really distinguishes him for us is the seminal book that he and Prof. William J. Baumol, wrote in 2000 and published bythe MIT Press, Global Trade and Conflicting National Interests. It was the most important contribution to the theory of international trade made in recent decades.

In June, in written testimony before the U.S. – China Economic and Security Review Commissionon China’s Five-Year Plan, Indigenous Innovation and Technology Transfers, and Outsourcing, he noted China’s rapid economic growth which is attributable to its favorable balance of trade with, mostly, the U.S. and its negative effect on growth and income distribution in the U.S. He writes:

While the inflow of cheaper consumer goods has been a benefit. That benefit, as we will show below, has come at too high a price. It is also clear that U.S. global corporations, in their normal pursuit of profits, are strongly aiding these developments. Therefore it is time to realize that the interests of our global corporations and the interests of our country have diverged....

On Thursday, July 7, 2011, the media reported that the U.S. Department of Labor announced a decrease in unemployment insurance claims to 418,000 during the week ending July 2 from the week before ending June 25, 2011. It was hailed as good news and the Dow gained 93points to close at 12,719. The fact is that the data cited was not the actual number but “seasonally adjusted” numbers. When you examine the unadjusted data as reported by the Bureau of Labor Statistics, my one-time employer when I was working on my Ph.D.in economics at the University of Chicago, you find that the actual number of claims actually increased during the last three reporting periods, not decreased. The actual number of new claims filed was 394,286 during the week ending June 18, 406,633 in the week ending June 25, and 416,798 during the week ending July 2. In other words, actual, not “adjusted” unemployment insurance claims were increasing not decreasing. The media reported a decrease in claims and not a single one on TV, radio and the press reported the actual figures which were included in the BLS report. The BLS chose to headline the “adjusted” figures.

Does the public have the right to know? A spokesman for the While House said he belives that the average voter worries only about his own job and therefore unemployment statistics will not affect his vote. It certainly is true that he won’t worry if only a cleaned-up version is publicized in the media. In the local Pittsburgh newspapers, one version based on an Associated Press story was that employment claims “fell by 14,000 to 418,000 in the week ended July 2, the lowest level since mid-May” . The other quoted from a Market Watch story that cited an Automated Data Processing report that the private-sector jobs gained 157,000 in June. The story continues, “Separate data showed that new claims for unemployment benefits fell by more than expected for the week ended July 2.”

The rosy reports somehow are not consistent with the employment data reported by the BLS July 8. “Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month.” Who would you believe? ...

To most economists, the continuation of this recession is a mystery. They do not know why the $787 billion 2009 Recovery Act economic stimulus plan did not stimulate the economy very much, if at all. And many economists, including Prof. Summers of Harvard and Prof. Krugman of Princeton and many other Keynesian economists, believe it was not enough of a stimulus. But $787 billion was not the only stimulus. In 2008, the federal government budget deficit on current receipts and expenditures (excluding government investment) was $755 billion, in 2009 it amounted to $1.5 trillion, and in 2010, $1.5 trillion. From a Keynesian point of view, these ought to have had a multiplier effect. As we showed in a previous contribution to this site, there is no Keynesian multiplier. As soon as the money is spent, the stimulus effect disappears; the Keynesian multiplier equals 1 not 3, 4, or 5. Or. less than 1 as in the case of the President's stimulus plan.

We offered in another contribution on this site the hypothesis that the $787 billion of Recovery Act expenditures was misspent. As we pointed out in an analysis of the economic stimulus plan, the expenditures could not have been designed by the administration to create permanent jobs. About a third went to support of states and school districts, which saved government jobs but created few new jobs. About a third went to climate change private projects especially wind and sun and bio-energy which, while creating few “permanent” jobs, caused the loss of a great number of jobs by impeding the growth of employment in mines, drilling for oil and gas, and discouraging the building of factories here while encouraging outsourcing abroad. ...

On June 25, the New York Timesrevealed that the California government is purchasing a bridge that was made in China. Here's a selection from the story:

The new Bay Bridge, expected to open to traffic in 2013, will replace a structure that has never been quite the same since the 1989 Bay Area earthquake. At $7.2 billion, it will be one of the most expensive structures ever built. But California officials estimate that they will save at least $400 million by having so much of the work done in China. (California issued bonds to finance the project, and will look to recoup the cost through tolls.)

And California is not alone, the New York government is also contracting with China for its infrastructure projects:...

[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

Journal of Economic Literature:

[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

Atlantic Economic Journal:

In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]